2 Chip Winners and 1 Also-Ran

by Brad Moon | April 25, 2012 7:30 am

Even though consumer tech industry giants like Apple (NASDAQ:AAPL[1]) had a stellar year in 2011 and have performed well so far in 2012 (with Apple’s second-quarter earnings report[2] putting an exclamation point on that), the companies that supply the components[3] for popular devices aren’t necessarily guaranteed the same degree of success.

Case in point, the semiconductor industry saw slow growth of 3% in 2011[4], even though its products are used in virtually all consumer electronics. PC sales were down, and even in the mobile market — which was hot — for every Apple there was also a Nokia (NYSE:NOK[5]) or Research In Motion (NASDAQ:RIMM[6]). While the overall microprocessor market is expected to grow 9% in 2012, some companies are better poised than others to benefit from demand. Here’s a closer look at three of them.

Texas Instruments (NASDAQ:TXN[7]) posted a net profit for the quarter of $265 million (22 cents per share) on revenues of $3.12 billion. Its numbers were down year-over-year, but they beat analyst expectations and TI’s own guidance.

The company is looking for 2012 to be a growth year. Customers were drawing on chip stockpiles last year but are now facing reduced inventory. TI has the manufacturing capacity to ramp up production to meet demand — unlike Qualcomm (NASDAQ:QCOM[8]), which is facing the possibility of not meeting meet chip demand[9] through the year. TI CEO Rich Templeton pointed to a 13% increase in orders during the quarter.

TI has set earnings targets of between 30 cents and 38 cents per share for the current quarter, reflecting a confidence that chip demand will recover from weak 2011 levels.

TXN shares rose 4% early Tuesday on the news, and then traded lower to close at $31.36. Year-to-date the stock is up 7.7%, but still down 10% from a year ago, when it traded at $35.90.

While TI was cautiously optimistic for 2012, U.K.-based ARM Holdings (NASDAQ:ARMH[10]) was flying high after posting its first-quarter results Tuesday[11]. Revenue was up by 13% year-over-year at $209 million, profit up 22% and earnings per share rose 23% to 40 cents.

Driving this growth was increased licensing of ARM processor technology, including 22 processor licenses signed during the quarter. ARM CEO Warren East, quoted in the earnings press release, was bullish on the company’s prospects: “With more customers choosing to deploy ARM technology in their products, this has been another quarter that underpins the long-term growth opportunity of the business.”

In addition, ARM noted that the backlog of new of products employing its technology was at historically high levels and that the revenue for these agreements would be recognized in future quarters.

Companies like SanDisk (NASDAQ:SNDK[12]) have been hurt by a decline in demand for components and price pressures in the smartphone industry, but ARM, whose processor technology is licensed by the likes of Apple and Samsung (PINK:SSNLF[13]) saw stable demand. Moreover, ARM benefited from 15% quarterly growth in ARM chips used in consumer and embedded digital devices.

Yet, despite the strong quarterly performance, ARM shares dropped 8.8% to $25.15 on Tuesday. Why? Analysts had been expecting full-year revenue of $882 million, compared to ARM’s forecast of $880 million. And while the backlog is at historic highs, there’s some uncertainty around Apple’s fortunes (which could vanish after Tuesday’s blow-out report) and Intel (NASDAQ:INTC[14]) is making inroads[15] in the mobile system-on-a-chip market. Still, earnings per share for 2012 are forecast at 51 cents, up nearly 22% from 2011. And analysts at JPMorgan (NYSE:JPM[16]) raised their recommendation[17] on ARMH from underweight to neutral.

Counterpointing ARM and Texas Instruments is STMicroelectronics (NASDAQ:STM[18]). Europe’s largest producer of semiconductors has been buffeted by turbulence in the mobile industry.

STM reported its first-quarter 2012 earnings on April 23, and they weren’t pretty. While the company had reported a profit of $170 million in Q1 2011, this year it was a $176 million loss — or 20 cents per share, worse than the expected 6 cent loss analysts were expecting.

The bulk of the hit came from the wireless division, reflecting poor performance from its joint venture with Ericsson (NASDAQ:ERIC[19]), ST-Ericsson, which lost $841 million in 2011. As part of a change in direction for ST-Ericsson, all aspects of that company’s application processor business (including staff and R&D activity) will be transferred to STMicroelectronics[20].

STM has released guidance looking for second-quarter revenue to increase by 7.5%[21]. Analysts aren’t looking for much in the way of earnings growth for the rest of 2012, with EPS expected in the 15 cent range compared to 41 cents for 2011. But they do see hope of a recovery in 2013. STM is currently trading at $5.71, down from $12.84 in February 2011 and its all-time high of $41.69 in 2009.

As of this writing, Brad Moon didn’t own any of the shares mentioned here.